Challenge Conventional Wisdom

conventional_wisdom

I try to be a person who challenges the people around me, and as a rule, I love meeting people who challenge conventions. Sometimes I find myself repeating something I’ve heard and believed all my life only to hear someone pipe up and question it. “Why would that be?”, they ask, or “are you sure you don’t mean ‘x’?” Being questioned is always a blow to your pride, but a lot of the time, people have good questions and bring up valid points. It forces you to come up with an answer, on the spot, and demonstrate whether you know what you’re talking about or alter your assertion. So here’s a piece of conventional wisdom you should believe and follow: Don’t believe everything you hear.

My wife and I are bucking a couple of pieces of conventional wisdom with a couple of decisions we’re making in relation to the real estate we’re in the process of purchasing. Here’s one thing I’ve always heard that I’m going against: always go with a 15 year mortgage if you can. We’re going with a 30 year mortgage. A 15 is available to us. The reason we’re going with the 30 is because, for us, we’re being offered the same interest rate on both a 15 and a 30. So we’re opting to go with the 30. If we pay it off over 30 years, we’ll pay thousands more in interest. Of course, we have no intention of paying it off over 30 years. We’re planning on paying the mortgage off quickly, making extra payments each month that go straight to principal. Because the interest rate is the same for either one, we think it makes sense to retain the added flexibility that the 30 offers. If we reach a point where one of us loses our job or we need the extra money because of some other kind of emergency, we can reduce our payment down to the minimum.

This brings us to the next piece of conventional wisdom – never take an FHA loan when you can take a conventional, because you can’t afford to throw away the extra money on private mortgage insurance (PMI). We’re taking an FHA loan, and only putting 3.5% down on the property. Contrary to popular belief, there are not income limits for FHA loans (although they are primarily used by lower income families because of the PMI). We’re able to take a conventional loan. We have plenty of cash that we could put down (especially now that we’ve sold our place). We could put down 20% without any problem. The PMI makes the FHA loan more expensive. However, the conventional loan has a slightly higher interest rate. We ran the numbers, and the difference ends up being about $3,000, with the FHA loan being more expensive over the life of the loan. However, it frees up about $45,000 for us to use for other purposes. Unfortunately, I have some student loans. Most of my student loan debt is at pretty favorable interest rates, but some of it isn’t. The 45k would be more than enough to pay off my debt and potentially make some improvements and upgrades to the units that we’re buying. It’s also enough to pay off the 14k we owe on our other rental property, which is at 6% on an adjustable rate mortgage. Being an ARM, it could, of course, go up in the future. 6% isn’t bad at all, but we’d like to get rid of it in case inflation causes interest rates to rise in the future. That loan resets once a year. After paying off my bad student loan, our other rental property, and making a few specific improvements we have in mind, we’ll still have about 10k to add to our emergency fund. This will put us in a sound financial position going forward and put most of our debt in one place – our income producing multi-family, where we plan on living for the next few years. We’re going against the advice we’ve gotten all of our lives and determining what’s best for us based on the information at hand. I hope you’ll do the same. Thanks for reading.